Mises Wire

3 Ways Marxists Get Capitalism Wrong

Only for a short while did the collapse of the Soviet Union silence Marxism. The fatal attraction of the thoughts of Karl Marx has returned — not because they are right but because they are wrong. Marxism serves to convert resentment into a social problem. Marxism is attractive because this ideology offers a huge arsenal of bile to fire up personal ire and to transform wrath into a political agenda. Here we shall address just a few of the wrong ideas of Marxism: the role of the capitalist and of inequality in a market economy and the function of profit and loss.

One: The Role of the Capitalist

The capitalist is the dark bogeyman of the market economy for the Marxists. He is the incarnation of all the evils of the capitalist system. Karl Marx fully misunderstood the role played by the capitalist. He identified the capitalist as someone who, like it was the case with his collaborator Friedrich Engels, owns a fortune and receives dividends and interest payments a rentier without an accomplishment of his own.

Biographers of the communist labor movement leader claim that Marx never saw a factory from within. Friedrich Engels, the financial sponsor of the Marxist project to conquer the world, was the heir of a fortune that his father had accumulated, and that the son would spend not only as a supporter of Karl Marx and the socialist movement but also as a playboy. Engels kept Karl Marx financially above water, particularly in the period after the socialist author had squandered the inheritance from his father and then of his wife.

Marx and his successors ignore that the capitalists pre-finance and preserve the capital structure of the economy. Capital formation requires, before everything else, abstention from using one’s full potential of consumption. The capitalists are those who do this by financing the production processes until the commodity reaches the consumer as the finished product ready for use.

In order to understand the role of the capitalists in the market economy, one must consider that each product runs through a lengthy production process until it reaches the consumers. This production process extends from the planning process onward through the different processing stages until the goods get to the warehouses and the exhibition and sales rooms up to the marketing to sell the goods. The receipts come only with the sale of the final good.

By the time when the capitalist receives income from the consumer, time passes, and the entire process is subject to risk and uncertainty. The capitalists receive their reward because of waiting and of bearing risks and uncertainties while the wage earners receive their remuneration regularly long before the product reaches the final consumer.

Two: Inequality

The inequality of income and wealth in capitalism as an injustice is a constant point of accusation of the socialists. Marx misunderstood the essence of inequality in a market economy and put the capitalist property into the same category as wealth holds under feudalism. Marx did not recognize that the market process creates inequality because the failed projects vanish.

The socialists see those who have accumulated a fortune. They lament the inequality and ignore the fact that the capitalist process is an elimination process that roots out the losers of the game. In a competitive market economy, the expression ‘successful entrepreneur’ represents a pleonasm because businessmen who have no success are forced to leave and must make room for those entrepreneurs who better serve their customers.

The market competition works as a continuous process of correcting errors. Under market competition, only the successful entrepreneurs, those who master the challenges of satisfying the wants of the customers, will remain in business. Failed businesses must disappear. Bankruptcies make capitalism productive and are a sign that the markets function. In the reality of the market economy, the Marxist construct of a ‘capitalist class’ does not exist because each member must struggle for his membership every day and under free capitalism, both the entry and the exit doors are wide open.

The inequality in capitalism is the result of an elimination process. The failed entrepreneurs disappear from the market together with their projects and their associated firms.

Three: Profit and Loss

Socialists denounce capitalism as a "profit economy." They indict making profits as the prime secular sin. By ignoring loss as the counterpart of profit, the socialist misjudge the role of profit in a market economy. Profit and loss, which arise from the difference between sales and costs, inform the business owner about the profitability of the company. If profit and loss disappear, the indicator of how well production serves the consumers vanishes with it. Without such signals, production takes place by happenstance and production may cost more than the goods are worth. Therefore, the production in socialist economies absorbs more material and human resources than the result will generate in utility. The lamented ‘exploitation' of human labor, which socialist blame to exist in capitalism, is the systematic reality under socialism.

In the Soviet efforts to industrialize Russia, this negative-sum economy of socialism cost a colossal toll in human lives and labor. In the second decade of the new millennium, this exploration of the masses continuous in Cuba, North Korea, and Venezuela. Karl Marx accused the market economy of the anarchy of production, yet it is, in fact, the socialist economic system, which suffers from chaos.

Planners can provide schemes to produce consumers goods based on surveys of the conditions among the population. For example, planners could try to determine how many pairs of shoes the population needs. Yet the planners cannot achieve these goals because they have no reliable and detailed knowledge about what consumers want but also do not have the guidelines as to the costs that producing the shoes would absorb in relation to satisfy urgent consumer wants, such as clothing, housing, and food.

The Central Role of Ordinary People in the Market Economy

In a market economy, the solution to this problem lies not in the hands of one central planning authority, but all market participants cooperate in the assessment process and delegate the production of the goods to different entrepreneurial units according to the specific capabilities of these individual companies that the market competition reveals. Each individual consumer expresses his subjective valuation in the act of purchase. The prices and the sold quantities are signals and incentives.

In a capitalist market economy, the owners of the means of production are involved at each stage of the production process to solve the valuation problem. But in the end, the valuation of the consumers determines the value of the capital that is employed in the production process.